As 2017 Winds Down ...
Tax talk dominated much of the end of 2017, and no matter how one feels about the final legislation that passed, it is now a reality. It seems fitting that this came at the end of a calendar year, when the nostalgic yearning to look back claims a strong hold on us all.
In a calendar year, tax reform went from a (clearly naïve) thought that a tax return would be done on the back of a postcard, to largely talking about the ACA and health care provisions of the tax world, to finally turning into a much more complete, and still complicated, package.
Just how this all turns out and what it means to you may not be fully understood and felt until we hit early 2019, for the new rules will not affect the 2017 tax returns that we shortly will begin preparing. So although it is a bit rarer at this time of year, we are looking ahead, too.
With it still being the holiday season, I do not want to take the time now to go through some of the stuff that changes under the new bill. I am sure that we will have plenty of opportunities to go through that deeper stuff over the next 18 months or so.
With it still being the holiday season, though, I did want to take this chance to express gratitude that we have been able to track this and take the trip together. If it were not for my clients, I would not get to make a career from this world, which I still love even during the maddening times.
In fact, it is during those maddening times when I feel that gratitude the most. For yes, this is not always an easy path, and it is littered with many numbers (some huge), and multiple pages of tax law that take a lot of time and effort to correctly parse and use to the best advantage.
Seeing how this all works out for your situation will take some time, but we look forward to helping you along that path, and are thankful for the opportunity to do so. Here then is a simple wish for 2018 to bring health and prosperity for everyone as we make the journey.
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As promised last week, get ready for business talk! Come on, you know it’s your favorite part of the holiday season.
In that previous blog, I wrote about how the state of our economy is causing more and more individuals to act like a business. At some point, though, it ends up making more sense to become an actual business. So this time I wanted to talk about the different forms a business can take. Each of these come with different tax considerations (which is too in-depth, and most likely too boring, to fully go into here), so that is something we should talk about if you are thinking about setting up a new venture.
First, there is being a sole proprietor. This is when you are in business for yourself, but have not actually incorporated your business.
Then, there is a partnership, which is exactly like it sounds. This is a group where everyone involved contributes something to the business. This can be money, property, labor, skills, etc., with the key being that everyone expects to share in the profits and losses of the business. The partners are not employees, but the profits or losses from the venture are passed through onto their tax returns.
A corporation is what one tends to think when thinking of larger businesses. In this case, shareholders exchange money and/or property for stock in the corporation. The corporation then realizes net income or loss, pays taxes, and distributes profit to its shareholders.
S corporations are corporations that pass their income, losses, deductions, and credits through to their shareholders. Those shareholders report this on individual tax returns, and pay individual income tax rates on it.
Finally, a limited liability corporation is a business structure that has slightly different rules depending on what state it is in. Owners in an LLC are called “members,” and this can include anywhere from one owner to many. Within there, the LLC can be treated as a corporation, partnership, or as a part of the owner’s tax return by the IRS.
If that sounds like it can be a little all over the place, that’s because it can, but there are great benefits of forming an LLC. The biggest of these is that it separates one’s personal assets from that of a business, making one not personally responsible for the debts and liabilities of the business.
In fact, all of these forms have benefits when used in the correct situations. Of course, that also means that there are drawbacks when not correctly used for a specific situation. This can also be intimidating because it is something that many do not even know they have to think about until it is time to think about it. When done correctly, though, it helps protect your interests and can put you in the best spot to have the biggest initial advantage when it comes to paying taxes. So when I said last week that it is good to sometimes think like a business, it is also good to sometimes become a business. And if you need some guidance with that, do not hesitate to reach out to us.
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Think Like a Business
As we jet through December, some people will start to gather information in preparation for filing their taxes next year. I don’t mean to say that this is something everyone needs to do, though. For example, if the only income you receive all year is from a regular job that will send you a W2 next month, that is going to handle a lot of numbers we have to fill in come filing time. More and more, however, that situation is covering less and less people.
Of course that one-W2 situation would never cover businesses (and I’ll return to them more next week), but many individuals are becoming more like a business in our current economy as they earn money in ways other than just through a paycheck, These extra bits of income can include a side business, freelance work, or even participating in the sharing economy. It is those people, who come with a slightly more complicated tax picture, to whom I want to speak to this week.
The society we live in makes it easy to become one of these people as the internet offers simple ways to make more money. Websites such as Fiverr and Upwork provide an arena for people to bring their skills to those who need them, making connections that could be impossible outside of the digital world. Many of these transactions are carried out for a nominal amount, but that still counts as income.
Possibly more prevalent are those getting money through the sharing economy. This ranges from Uber drivers to those offering up their home, or even exclusive properties, on Airbnb. So even if you have not technically made yourself a business, it is possible that you have been getting some money in a way that means you should start thinking like a business.
The first thing I want to make you aware of in these situations is the self-employment tax. I could spin off into too many paragraphs about how this works, but will try to keep it simple. This boils down to the government ensuring you still contribute to social security and Medicare out of income earned through self-employment. This is something that many are unaware of until they have to pay it.
On the other side, though, many types of self-employment will also come with expenses that become tax deductible when they are incurred by doing this type of business. Just what is an allowable deduction (or how much of it is deductible) will vary depending on what it is you are doing, but chances are really good that there is something you can deduct.
And there we loop back around to where it can pay to be conscientious and think about these things before it is time to file your taxes. Thinking like a business will only result in better numbers at the end of the process, and the best businesses stay on top of things. So please be aware that we are open for planning meetings now to help you get the most out of this and all coming years
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Tax reform has moved closer to becoming fact, so there is at least a middling chance that there could be big changes coming before the end of the year that may affect how much we owe in taxes when it comes to file them in early 2018.
Now just what those changes may be is still far from certain, and may not be completely clear until we get down to putting pen to paper (or fingers to keyboard) and actually entering information into tax forms.
Even in this time of uncertainty, though, one should not hide from taxes, or throw up our hands and decide that there is nothing we can do. As always, there are advantages to handling these things straight-on, and tackling them as early as possible.
And yes, that can mean starting now. So here are my top five reasons to start preparing for tax season now:
1. Choice of appointment time
All the procrastination that happens come tax time means that we get VERY busy in April as everyone tries to finish up in days what they had months to do. I like to think that we do a good job of accommodating everyone, but that means you may need to take an appointment time that’s not ideal. I assure you, however, that many of those ideal times are open in January and February.
2. Starting early equals more time
And let’s be honest, the vast majority of us do not keep a folder through the year where we can slide in pertinent tax documents that we have gone over and collated chronologically. A little mindfulness now means there less chance that you’ll forget about something you need in the future.
3. More time equals more opportunity
Also, when the time crunch is not on, you have more of a chance to gather information that you may not have even known would help you. One of my favorite things during tax season is making people aware of deductions they did not know about. But when it’s April 15th, tracking down a receipt to save yourself $20 pales in comparison to just getting things filed on time. If it’s February 15th, though, going home and spending the 15 minutes it may take to get some another documents turns out to be a much more manageable proposition. And when it only takes five minutes, most of us are okay with working at a $240 an hour clip, right?
4. Decrease your stress
We’ve all waited into April at some point to do our taxes, right? We also all spent the weeks before that thinking of how we should get moving, how we’re going to spend the weekend getting everything together, and then feeling the stress build as it doesn’t happen, right? Why not make yourself a promise now to not feel that pressure this year.
5. Moves can still be made
And this is because you don’t even have to wait until the calendar changes to start this work. I’m not going to pretend that there is some secret magic move that we can do in these final weeks to remove your tax bill or even decrease it by 50 percent. We can, however, do some smaller things like making charitable donations or putting money into retirement funds that could decrease your final bill.
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